Every day, the news includes fresh reports of economic uncertainty and of companies in trouble. Suspicion is up, confidence is down. Generally speaking, it’s been a rough stretch for business.
While the importance of maintaining your business accounts in an FDIC-insured bank are obvious, you should also know that the FDIC is more than just an insurer. As an independent agency of the federal government, the Federal Deposit Insurance Corporation was created to preserve and promote public confidence in the U.S. financial system.
Its primary role is to identify, monitor and address risks to the deposit insurance funds and to limit the effect of the economy and the financial system if bank or thrift institution fails.
In an economic environment in which many portfolio balances and other investments have declined, it is reassuring to know that certain accounts and funds needed to operate your business — or that have been allocated for specific needs — are protected and will remain secure, regardless of market fluctuation.
The FDIC conducts its assessment of banks using the Uniform Financial Institutions Rating System (UFIRS), which has been in place since 1979 and was updated in 1997. It has been an effective tool for evaluating the soundness of financial institutions on a uniform basis and for identifying those that require special attention or concern.
The system considers certain financial, managerial and compliance factors that are common to all institutions. Government agencies endeavor to ensure that all institutions are evaluated in a comprehensive and uniform manner, with special attention focused on those that exhibit financial and operational weaknesses or adverse trends.
Each financial institution is given a rating based on an evaluation of six essential components of its financial condition and operations: the institution’s adequacy of capital, the quality of its assets, the capability of management, the quality and level of earnings, adequacy of liquidity and its sensitivity to market risk.
Composite and component ratings are assigned based on a 1 to 5 numerical scale. A “1” indicates the highest rating, strongest performance and risk management practices, and the least degree of supervisory concern; a “5” indicates the lowest rating, weakest performance, inadequate risk management practices and, therefore, rates the highest degree of concern.
The ability of management to identify, measure, monitor and control the risks of its operations is also taken into account when assigning ratings. For more information on the rating system and the role of the FDIC, go to the agency’s Web site at www.fdic.gov.
Since the start of FDIC insurance on Jan. 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure. It is important to remember, however, that the FDIC insures deposits only and does not insure mutual funds, securities or similar types of investments that banks may offer or investment accounts typically promoted by many brokerage firms and financial service companies.
Banking is a competitive business. A well-managed bank will offer rates that are competitive while adhering to strict regulations and exercising all prudent methods to manage risk.
Faye T. Pantazelos is president and CEO of New Century Bank and its parent company, NCB Holdings Inc. She founded NCB Holdings, which provides corporate banking services, in 1997. Reach her at (312) 944-5400 or www.newcenturybk.com.
